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Philip Hammond to warn Tory leadership hopefuls they need a Brexit 'plan B'

Chancellor Philip Hammond is to warn the remaining Tory leadership contenders they need a Brexit plan B. Credit: PA

Philip Hammond will challenge the Tory leadership contenders to set out a Brexit "Plan B", and hint that another referendum may be required to break the deadlock.

The Chancellor will use a major speech in the City of London to warn that a no-deal Brexit could hit the public finances, risk the break-up of the UK and damage the economy.

He will say that the £26.6 billion of "fiscal headroom" - which could potentially be used to increase spending or cut taxes - would be soaked up by a no-deal Brexit.

Mr Hammond will say: "I cannot imagine a Conservative and Unionist-led Government, actively pursuing a no deal Brexit; willing to risk the union and our economic prosperity."

It would also risk a general election "that could put Jeremy Corbyn in Downing Street", he added.

Mr Hammond will warn his colleagues that £26.6 billion of 'fiscal headroom' would be used up by a no deal Brexit. Credit: PA

It comes after Rory Stewart, the only Tory leadership candidate ruling out a no deal exit, was eliminated from the contest.

He said: "Now that I've left this race, I'm the only person in the race that was saying a no deal Brexit would be a bad idea, every other candidate has left no deal on the table."

He added: "Clearly, the majority of my colleagues in the House of Commons at the moment agree with them and not with me."

With all the remaining candidates leaving no deal as an option, Mr Hammond will call for a Brexit "outcome that protects the union".

"I will fight, and fight again, to remake the case for pragmatism and, yes, for compromise in our politics - to ensure an outcome that protects the union and the prosperity of the United Kingdom," he will say.

In the Mansion House speech on Thursday, Mr Hammond will say that the remaining leadership contenders need to spell out what will happen if their Brexit plans falter.

He will stress that Parliament has shown it will not allow a no-deal Brexit and it has already rejected Theresa May's Withdrawal Agreement and Political Declaration.

He will say: "It may be that I'm wrong, and a new leader will persuade Parliament to accept the deal it has already rejected, or that the European Union does a 180-degree U-turn and re-opens the Withdrawal Agreement."

But if not, candidates must set out what they will do.

Mr Hammond claims a general election 'could put Jeremy Corbyn in Downing Street'. Credit: PA

"If your plan A is undeliverable, not having a plan B is like not having a plan at all," he will add.

Mr Hammond, who has not declared who he is backing, will call for the would-be premiers to be "honest with the public".

In a hint at the possibility of a second referendum, he will say: "If the new prime minister cannot end the deadlock in Parliament, then he will have to explore other democratic mechanisms to break the impasse.

"Because if he fails, his job will be on the line - and so, too, will the jobs and prosperity of millions of our fellow citizens. "